Price Action: Inside Bar

Continue to publish the materials according to the method of Forex trading called Price Action. Today’s topic is the pattern Inside Bar. Inside bar along with Pin-Bar, is a very powerful Price Action setup, if you apply it wisely.

This setup is quite famous among the Forex traders and is one of the fundamental in the methodology of Price Action. It is most often referred to as continuation patterns the major trend, although it can act as a reversal pattern.

Overall, the Inside Bar is a figure for the trained traders because the beginners in Forex may have difficulties with his interpretation. However, if you know how to use Inside Bar and what you should pay attention to, with the help of it, you can catch a pretty strong trend.

About this and many other things we will discuss in this article today.

How does Inside Bar look like?

Inside bar is a full-bodied candle followed by a candle of small size, that is entirely inside the range of the previous (full-bodied) candle:

Full-bodied first candle is called the maternal candle. This candle needs to be at least two times larger than the inner candle.

If you see on the chart the full-bodied candle, behind which there is a candle inside its range, but it is large in size, then this combination is not proper Inside Bar:

Why is it so? Because in this case, all logical sense of this setup is lost. Why do we take into account this phenomenon and why we can use it to trade? To do this we should answer another question.

What does this figure mean?

It means that the strength of the current movement lost meaning, as the next candle is small in size, and there is a temporary agreement in price between buyers and sellers. We can say that it is a small truce before a new battle. During this truce, we can enter the market and follow the established trend. Or we can enter against the trend.

Next, we’ll analyze in what direction you should enter and what you should pay attention to.

As in the case with other Price Action setups, we need support on the level of support/resistance. If you’ve seen Inside Bar, that is situated somewhere in the middle of the chart, you should not enter in such transactions, as the pattern has no support.

Directly on the chart, Inside Bar looks like the following:

As you can see, first a full-bodied candle comes, followed by a small candle. In this example, we had Inside Bar, which was countertrend.

It had to support on this level:

It is interesting that it is not necessary that a maternal candle supported on the level with its base. If the Inside Bar is on the level and has support, then you have every reason to enter the market.

This example depending on the interpretation and your trading method of entry into the market, most likely, would bring a loss. However, with a certain approach, it could give you profit.

Another example of this setup:

Maternal candle breaks the level, and then there is an Inside Bar, which is based on the level. And this is round 1.5500 level. As we know, round price values are important levels of support and resistance.

In this example, you should pay attention to the fact that the low point of an inside bar is lower than the low point of the maternal candle. Such an error is permissible. As this is a daily chart, these 4 pips can be considered a small error.

Remember, that technical analysis is an art, not an exact science. And small deviations are possible that is why this setup is still valid.

How should we enter the market correctly?

Let’s say that we were able to determine that our setup is quality, it is on the level and meets our trading technique.

There are two most common techniques to enter on Inside Bar:

• Classic – entry on the breakout of the maternal candle.

• Entry with the pending order on the breakout of the Inside Bar:

Which way would be most correct in your trading?

All depends on how much you want to be sure in entering the market.

Classic entry on a breakout of the maternal candle at the point of high / low works slower. The fact is that you enter the market later, but you get more confidence in the selected direction of the price.

The entrance on the breakout of the extreme point of the inside bar is earlier, but it is risky. You enter the market earlier, but if the price breaks through the outermost point of the inside bar and then move another side, then your stop loss, which could not happen, will trigger.

As for me, I tend to work with the breakout of the maternal candle. Thus it is necessary to always look at the situation. You need to estimate where inside bar is in relation to the maternal candle, how big the maternal candle was, where the level, symbolizing a footing, is now. All of this requires your experience in the Forex market.

How should we set a stop-loss correctly?

In any deal, we always set a stop loss. This is necessary in order to protect your account and not incur large losses. There are several options for setting a stop loss for this setup.

The first of them is a classic one. We set stop loss over the opposite side of a maternal candle:

This option is not very effective, as a maternal candle can be very large, consequently, the stop may be too large, and if such order will work out, it’ll harm your deposit.

Another option is setting of the stop loss after level:

This option is more reasonable, as a crossing of the level would mean that we were wrong. It should be used when it is adequate. That is, it doesn’t have risks of a huge number of pips. If the level is not very far from the entrance, then we can use this option.

And the final option is setting of stop-loss for the opposite edge of the inside bar.

It is an adequate trading option too.

You might think that this stop loss is very easy to dislodge. Let it force us to repeatedly make mistakes but it will also periodically let us make profit trades, which will be several times more than our initial stop loss.

Thus, when there is a mistake we will lose a minimal number of pips.

How should we set a take-profit correctly?

After we set a stop loss we need to set a target and a take profit.

What options are possible here?

At first, we can set a take profit at the next level of support/resistance:

Secondly, there can be a stop loss multiplied by the N-th number of pips.

It can be a fixed take profit equal to 30-40 pips on a daily chart. If you trade on the charts below, there will be the smaller number of pips.

This option is ideal for those who want to be sure that the profit will be taken. It will be not quite big, as it can be, but the probability of getting is high. If you use this approach with a small stop loss, it has the right to life. Also, we can use trailing stop to exit trades automatically.

Let’s imagine that we have set a stop loss of 20 points. The price passes by 40 pips, and we transfer a trade to breakeven. That is, we move the stop loss to the level of the entry point. Next, we set a trailing stop or some distant target. Even if the market will turn against us, we will not lose anything. The most common methods of getting profit for this setup is the next level, a fixed number of pips and a stop loss multiplied by N.

Which of them should we choose as the best one?

It depends on your trade and market situation. For beginners, I suggest using a fixed level. Set a certain number of pips, depending on currency pair and timeframe. But you should remember that this fixed number must be greater than the inside bar.

The nuances of working with Inside Bar

Enter on the trend

I am sure that you could read and hear it for many times but I still want to repeat that you should enter on the trend. This increases the chance of getting a profit in the transaction.

Size of the maternal candle

If the maternal candle is disproportionately huge and exceeds inside bar 10 times, then most likely, there will be a significant pullback and you should not take such setup.

If the maternal candle is too big, it is better to skip this setup:

If there was formed inside bar after a similar candle, then you should not enter the market. The candle is too big and the probability of the rebound is too high. We try to skip big candles.

Do not trade flat

Any setup consisting of one or two candles must be after some movement. If the candles are in a row and there is a setup, you should not get into it. It is better to skips than to risk unnecessarily.

Take inside bars of small size

As we have seen above, inside bar means a temporary agreement in price between buyers and sellers. How can there be an agreement in price, if inside bar is big? If it is rather big, so there is no agreement, and, most likely, there is a completely different situation in the market.

Entrance in the direction of inside bar

It can significantly increase an efficiency of your work with this setup. What do I mean?

Let’s imagine that we have a bullish maternal candle and an internal candle is bearish. So, we consider the entrance only in the direction of SELL. If the inside bar is bullish, we consider the entrance for BUY only.

Why does this happen?

As we have seen earlier, inside bar is a temporary agreement between the sellers, but there is some advantage. This is what inside bar shows. In my trading, I try to take the setups that match the color of inside bar. If the inside bar is bullish, we are looking for the chance to BUY. If inside bar is bearish, we are looking for an opportunity of an entrance to SELL. This filter will help to increase the overall profitability of trading on this setup. Remember that you may not to pay attention to the color of the inside bar. In any case, it will work, but the efficiency of the pattern will be slightly less.

Trade only during US and London session

Like other Price Action setups, Inside bar begins to work well from H1 timeframe and higher. If you trade within the day, then try to trade during London or US sessions. Because after we have found an area of agreement between buyers and sellers, we need any movement to take profits. If the setup is formed in Asian session, then such movement may not to be, but if it is so, then what is the point to enter a position, isn’t it?

If the inside bar is Doji or Pin-bar

If the Inside bar formed a Doji pattern or a figure of Pin-bar, then in such cases I would not advise entering the market because the situation is unclear:

The chart shows a bullish candle and followed inside bar. But this bar is a Pin-bar with a huge tail. Such a signal should be skipped. It is better to calm down and wait for further developments. As you can see, nothing happens on the chart.

Some examples

On the chart we can see the Inside bar with a support on the level:

Pay attention that the Inside bar takes half of the maternal candle, and in this case, I would not recommend entering the market.

Even if we see a slight increase in the future, but next time it may turn against your positions.

Another figure that you should skip is shown in the following screenshot:

The Inside bar has a very long tail. As we can observe in the future, there was not growth, so we would not enter the market here.

In the following example we see adequate situation:

Inside bar is within reason. The tail is longish, but not critical. We can say that there was consent in this place.

Pay your attention to the fact that the bar was bullish. So an adequate option would be to trade purchases. Next, we can observe the upward movement. The nearest resistance level is located just below the inside bar. In this case, we could enter to buy with the pending order just above the High point of Inside bar and take some profit.

We would set Stop-loss just below the low point of our inside bar:

With such not very strong level of resistance, I would consider the small target with the size of inside bar. In this case, there are approximately 85 pips. And although we could take a little more number of pips, I would not risk in the presence of such weak support.

Now I would like to show you this area:

You can find Pin-bars, Inside bars, Rails and many other setups here. But there are no previous movements on this segment. So we just ignore this behavior of price. Some movement visible with the naked eye should proceed to any figure consisting of one or two candles.

Let’s consider another interesting example:

Here we see that the setup Rails appear after the level. After that, a bearish candle appears, and then the pattern of Inside bar appears. Even though the level is far from the existing setup, however, it relies on the previous setup. And this combination gives us the opportunity to enter a trade. We would set a stop loss just above the Inside bar.

As we can see on the chart, the trend was clearly bearish, and therefore it would be possible to get a good profit. By itself, the setup was not very strong. But, nevertheless, using a trailing stop, we could take up a lot of pips.

The following example shows a situation where the maternal candle gets a very long tail:

Here we can observe the preconditions for a trend reversal. Opening position against the trend, we should rely on small targets and if we are not greedy, we will take profit in this case.

Another setup with the support on the level:

As I have often repeated to you in this article: “No need to be greedy”. Set small targets and stop losses. In this case, you would also be able to take a small profit.

Another example of countertrend:

As you can see, the price after the formation of the setup has passed a large distance upward. It would be possible to take target 2 or 3 times more than stop loss.

I think many of you have a logical question: How should we enter the market on the Inside bar? With the trend or against the trend?

The answer is very simple. You should look at the inside bar, at its directions, as well as at the movement of prices in the form of levels of support and resistance.

The inside bar appears on short timeframes more often. These include hourly and minute charts. This is due to the fact that days of consent are less possible than hours of consent between buyers and sellers. It is because there are plenty of various events in one day.

Another example, where the price is in the channel, and there is no any clear trend:

But if we would pay attention to the inside bar and set an order to buy, we would get a good profit.

Conclusion

Inside bar - is not an easy setup for interpretation. Good inside bars are not so often on the charts, so don’t look for them where there are none. If you are unsure, it is better not to enter the market. Always look at the direction of the Inside bar, as it very often suggests the future direction of prices.

It is the best to enter with the trend, although there are cases when the Inside bar appears against the trend. Pay attention to the size of the maternal candle and inside bar. If the maternal candle is very large, then you should not enter, because the rebound is possible. Try not to trade the signals during flat. There must be some movement before the appearance of the setup.

If you trade within a day, open positions only during London and US sessions. If the Inside bar is a figure like a Doji or a Pin-bar, then you should not enter, because nothing good will come of it.

Take care, Michael

ForexTraderPortal.com